HOTEL ConfidentialChallenges Have Only Just BegunFor Hotel Owners and Operators

THE MIDYEAR 2010 MARKET REPORTS FOR HOTEL
performance are in, and the picture is not pretty. Blame and denial
for declines in valuations and operating performance are rampant,
but those tactics will provide no solutions to existing issues. The
bottom line is that the hotel business segment has gone through a
gigantic reset. Valuations do not relate at all to construction costs,
expense and revenue growth are not in balance, customer buying
habits have permanently changed and
the availability of the most lucrative
customer segments has diminished
demand compression.

It may beperverse, butthe big winnersmay have beenhotel owners, who unknowingly soldtheir hotels in return for cash yield-ed from high leverage refinancingbetween 2005 and 2007, even thoughthose same own-ers may now befacing foreclosure. Then, they were actuallypaid more for their hotels than those samehotels are worth now.

Hotel operators have done little to help
their own cause. In denial of their miscues
of the early 2000s, many operators have
given over control of guestroom inventory
to third party online travel agents, who not
only demand deep discount pricing, but then
further command commissions or fees of up
to 25% for special promotions with prime
positioning.

Even though it maybe sound rational for
an operator to poach market share with
price incentives during equally low demand
and compression periods, it’s tragic when
they offer discount rates to conventioneers
who opt out of their pre-negotiated room
rate block to buy down to a lower rate in the
same hotel. It’s no wonder that hotels cannot
return an adequate profit to their owners,
and it questions the wisdom of expensive rev-enue-management system investments made
by hotel operators with their owner’s money.

The only real solution to hotel business woes is demand
compression, which would tip the supply/demand balance in
favor of hotel operators. Compression will not return, however, until the most lucrative customer segments, commercial
transients and meeting groups, return. Until then, reliance
on business traveler scraps and price-driven leisure travel will
continue to yield frustration for any hint of revenue and profit
growth.

By Rick Swig

And when will compression return? Just look to the unemployment statistics and job growth. Significant compression
growth will be visible only about six months after any three-month period of consistent private-sector job growth. That is
when companies will redeploy travel and meetings activities.

Owners are either in survival or transition mode. The focus of
hotel ownership has moved away from retail profitability to financial engineering to enable continued ownership. Some owners
are managing by continuing to pay debt even though other loan
covenants are not being met, while some have negotiated debt
relief through pay downs and other balance sheet horse-trading.
Of course, there are those who are expecting or have already
realized the pain of the loan executioner’s sword.

Ironically, the worst possible owner is probably a lender, special servicer or other like party without real hotel experience.
As most have shortcut their takeover activities by not engaging
professional advisors, these “tweener” owners will be taking over
assets without anticipating the effects of survival-mode predecessor owners who milked their assets dry.

As a result, should it really be surprising
that the next wave of owners should expect to
pay lower-than-historical prices for transitioning assets? At this moment there are hotel
assets selling for unexpectedly high multiples
of NOI and transaction-starved buyers who
for some reason can rationalize 20 times or
more multiples of NOI for an acquisition.
This is even in the face of at least one or
two more years of unexciting operating performance. Whether these aggressive buyers
are superstars for their clairvoyance or suckers will ultimately be recognized. Inevitably,
there may be more properties in need of
transition than there will be buyers, so the
valuation re-set should be realized.

By some estimates, there was a 90% reduction in hotel asset transactions in 2009, as
owners were not ready to accept reduced
values, debt was not available or potential
buyers were spooked by the sick health of
the hotel sector. Lender and owner balance-sheet issues, debt-covenant compliance, cash
shortages and even owner fatigue are now
forcing more properties to be made available for sale. Regardless of whether these
are the deals of the century, successor owners will be challenged
with the residue of aforementioned operator protocols, the
hazy timing for the return of demand compression and physical
buildings with expensive product improvement deferrals. ◆